Labor & Employment Law Daily Wrap Up, ARBITRATION—1st Cir.: Employer cannot compel arbitration of wage claims by au pairs, (Jun 20, 2025)

By Nicholas Kaster, J.D.

The absence of a reference to an otherwise identified third party in a contract's arbitration provision was evidence that the signatories did not intend to confer arbitration rights on that third party.

Affirming a district court’s denial of an employer’s motion to compel arbitration of statutory wage claims asserted by au pairs, the First Circuit determined that the employer premised its claim on a contract between the au pairs and a Swiss company that contained an arbitration agreement. A party who is not a signatory to a contract cannot invoke its arbitration provisions to compel the arbitration of claims brought by a party who is, said the court. As such, the employer could not demonstrate with “special clarity” that the signatories to the contract intended to confer upon it the authority to enforce the parties' arbitration agreement (Morales-Posada v. Cultural Care, Inc., No. 24-1248 (1st Cir. Jun. 18, 2025)).

The employer is a Massachusetts company that places foreign nationals as au pairs with host families throughout the United States. It is a designated sponsor of the U.S. Department of State's au pair exchange program. Four foreign nationals who participated in the program as au pairs filed suit, alleging that the employer violated their rights under the FLSA and various state wage and hour laws by failing to pay them legal wages for their work as au pairs.

Arbitration. Subsequently, the employer moved to compel arbitration of the au pairs’ wage claims based on a contract that the au pairs signed with a company called International Care Ltd. (ICL). ICL is a Swiss company that is “separate and distinct” from the employer that provided “recruiting, screening, and other pre-departure services” in connection with the au pair program. The district court held that the employer could not enforce the arbitration agreement as a third-party beneficiary because the contract did not demonstrate with “special clarity” that the contracting parties intended for the employer to benefit from the arbitration agreement. It separately concluded that the employer could not enforce the arbitration agreement based on the doctrine of equitable estoppel because none of the au pairs’ claims depended on anything contained in the contract. The current appeal ensued.

Third-party beneficiary? First, the court acknowledged that nonsignatories may invoke arbitration agreements in certain circumstances. In particular, traditional principles of contract law permit a contract to be enforced by or against nonparties to the contract through “third-party beneficiary theories” and the court agreed that this general rule applies equally to an agreement to arbitrate. The employer here argued that it was entitled to enforce the arbitration agreement in the contract as a third-party beneficiary. The First Circuit, however, was not persuaded.

The critical fact that determines whether a nonsignatory is a third-party beneficiary is whether the underlying agreement manifests an intent to confer specific legal rights upon the nonsignatory. The showing of a mere benefit to a nonsignatory resulting from a signatory's exercise of its contractual rights is not enough. Moreover, because third-party beneficiary status constitutes an exception to the general rule that a contract does not grant enforceable rights to nonsignatories, a party aspiring to such status must demonstrate with “special clarity” that the signatories intended to confer upon it such a benefit.

The relevant question in determining whether a nonsignatory can enforce an arbitration agreement under a third-party beneficiary theory is whether the signatories intended to confer on that third party arbitration rights, not just any right under the contract, the appellate court explained. Accordingly, even if a nonsignatory can show an intent of the contracting parties to confer upon it some benefit unrelated to arbitration, the language of the arbitration clause would still be dispositive as to their authority to enforce that provision. Other contractual provisions may bear on, or provide evidence of, the parties' intent with respect to arbitration. But, even still, the relevant question for the court remains whether the nonsignatory is an “intended third-party beneficiary of the signatories' agreement to arbitrate.”

Because the employer could not show that the district court was wrong to ask whether the signatories to the contract intended to confer on it the right to compel arbitration, the First Circuit said it must affirm the district court's conclusion, based on its resolution of that question, that the employer was not entitled to compel arbitration. That was because the employer made no argument that, if that were the relevant question, the district court would still have been wrong to conclude that the contract did not demonstrate with the necessary “special clarity” that the employer was an “intended third-party beneficiary of the signatories' agreement to arbitrate.”

Scope. The court noted that the employer raised no objection to the district court's analysis of the arbitration provision itself or what the language of that provision demonstrated regarding the signatories' intent. The only argument that the employer advanced concerning the text of the arbitration agreement was that the au pairs’ claims fell within its scope. However, the appellate court explained, the question of whether a particular dispute falls within the scope of an arbitration agreement is distinct from the question of whether a particular party is entitled to invoke that agreement. And, significantly, the burdens to make these showings are distinct, as well.

Special clarity. A nonsignatory “faces a steep climb” to show that it may enforce an agreement to which it is not a party, the appellate court said, and it must make that showing with “special clarity.” Thus, by advancing arguments about how to construe the arbitration agreement as if the issue of its third-party beneficiary status was properly treated as one that concerned the agreement's scope, the employer assumed the existence of a policy favoring arbitration. But application of such a policy, said the appellate court, “presumes proof of a preexisting agreement to arbitrate disputes arising between the protagonists.” In the absence of such an agreement between the protagonists here, however, the employer was required to demonstrate with “special clarity” that the signatories to the contract intended to confer upon it the authority to enforce the parties' arbitration agreement. Yet the employer did not attempt to meet this burden while treating the language of the arbitration agreement as being relevant to the question.

The district court explained that the arbitration agreement did not even make an ambiguous reference to the employer. Although some provisions in the contract referenced “affiliates” and “staff in the United States,” the arbitration agreement notably contained no such reference. Instead, the arbitration agreement mentioned only the “parties” and ICL's successors and assignees, none of which included the employer. “Our cases have consistently relied on the absence of a reference to an otherwise identified third party in a contract's arbitration provision as evidence that the signatories did not intend to confer arbitration rights on that third party,” the First Circuit stated.

Thus, the appellate court concluded that the employer failed to make the showing necessary to demonstrate its entitlement to compel arbitration as a third-party beneficiary of the arbitration agreement in the contract.

Equitable estoppel. Alternatively, the employer argued that it was entitled to enforce the arbitration agreement under the doctrine of equitable estoppel. Generally, in the arbitration context, equitable estoppel allows a nonsignatory to a written agreement containing an arbitration clause to compel arbitration where a signatory to the written agreement must rely on the terms of that agreement in asserting its claims against the nonsignatory.

The employer contended that equitable estoppel was appropriate here because the “policies and powers” that the au pairs asserted gave the employer control over their conditions of employment—and would therefore establish an employment relationship—all stemmed from the contract. The court found this argument unpersuasive.

The au pairs’ claims did not directly invoke the terms of the contract, either to challenge those terms or to enforce a right created therein. Nor was the court persuaded that the resolution of the claims against the employer depended on the au pairs’ contract with ICL. The district court rightly determined that it was entirely possible that the au pairs’ claims—which were all statutory in nature—could proceed without any reference to the contract. Thus, the court concluded that there was no basis for applying equitable estoppel in this case.

Accordingly, the District Court's denial of the motion to compel arbitration was affirmed.

The case is No. 24-1248.

Judge: Barron, D.

Attorneys: Helen Clara Coleman (Nichols Kaster) for Karen Morales Posada. William B. Adams (Quinn Emanuel Urquhart & Sullivan) for Cultural Care, Inc.

Companies: Cultural Care, Inc.

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